RE-THINKING DIRECTORS’ DUTIES: AN ANALYSIS OF THE PROPER PURPOSE DOCTRINE
| Citation | (2002) 14 SAcLJ 387 |
| Published date | 01 December 2002 |
| Date | 01 December 2002 |
1 Since 1992,1 the corporate spotlight has been trained onto the concept of corporate governance as it assumed prominence within legal and business communities around the world. Singapore as well, has latched onto the insipid rubric of “corporate governance” none too belatedly and with great enthusiasm. The Asian financial crisis which struck the region in 1997 had served as a timely reminder as to the possible pitfalls of ignoring the importance of corporate governance and its significance has been reinforced yet again as we look towards the recent spate of accounting scandals and corporate failures in United States.
2 Subsequent to the Asian financial crisis in 1999, Singapore’s Ministry of Finance commissioned the setting up of three private sector-led committees to re-examine and to review the corporate regulatory framework,2 disclosure standards3 and corporate governance reforms,4 in a move displaying the Government’s commitment to promotion of corporate governance. In particular, the Committee on Company Legislation and Regulatory Framework (“CLRFC”) is in the process of reviewing the existing legislative framework governing companies in Singapore. Amidst the numerous suggestions put forward by the CLRFC in its Public Consultation Paper published on 22 October 2001, the possibility of adopting a partial codification or a restatement of the existing directors’ duties owed to companies was mooted.5 Within the context of a renewed emphasis on corporate governance, the need to clarify the law on directors’ duties and the consequences of these duties being breached is undisputed and long overdue. Arguably, the broadening scope of commercial and financial activities of company directors within the last few decades has left judicial attitudes trailing in the wake of these developments.
3 This paper purports to limit the scope of discussion to a single aspect of the directors’ duties, viz the “duty” of the director to exercise his or her powers for proper purposes. Firstly, the author will attempt to broadly review the genesis and evolution of the proper purposes doctrine into an independent head of directors’ duties. This review will be followed by an analysis of the nature and the subsequent application and mechanics of this doctrine. The author will also attempt to rationalise the uneasy relationship of the “new-found” independent status of the proper purposes test vis-à-vis the traditional bona fide test as viewed by the English and Australian authorities. It will be demonstrated that the re-emergence of the proper purposes rule from the shadows of the bona fide test is to be viewed cautiously as yet another justification for the courts’ adoption of an interventionist approach towards reviewing corporate decisions and directors’ excesses. Further, it is suggested that given the different, albeit admittedly overlapping, ambits of the proper purpose and bona fide tests, the former ought not merely be a convenient alternative or a subset of the latter. On the contrary, it may be argued that the scope of application for the proper purpose doctrine (and hence its utility and importance) supersedes that of the bona fide doctrine. References to company law reforms and ongoing legislative initiatives to codify the proper purpose rule in these respective countries will also be made where pertinent.
4 Directors derive their powers from the company’ s constitution upon its incorporation and are typically vested with all the powers of the company pursuant to Art 73, Table A of the Fourth Schedule of the Singapore’s Companies Act.6 In this sense, directors are traditionally viewed as agents or trustees of their constitutional powers for the benefit of the shareholders of the company,7 and courts may control excesses of company directors via the doctrine of ultra vires8 and via the imposition of fiduciary duties and statutory duties.9 Essentially, directors’ duties are regulatory and prescriptive
areas of the law, with the fundamental purpose of regulating conduct and promoting high standards of loyalty akin to those required of trustees.10
5 The fact that equity has extended its long arm beyond the traditional tenets of trust law to company law is unsurprising given the fusion of common law and equity in 19th century England.11 With the assumption of jurisdiction over corporate matters by the Chancery Courts, it was merely a matter of time before Chancery judges applied equitable norms to company directors in restraining any improper exercise of their powers.12 It has been argued, however, that notwithstanding the discernible parallels between directors and trustees or agents, directors “are more properly classified as sui generis”13 and caution ought to be exercised as such “in transferring elements of trusts law to corporate law”.14
6 For the purposes of our discussion, Lord Greene MR’s famous dictum on directors’ duties with regards to the exercise of their powers in Re Smith v Fawcett Ltd15 bears repeating. In that case, Lord Greene MR held that the director’s duty to exercise his discretion in a manner in which he or she considers to be in the best interests of the company is to be qualified by their “duty” not to act for any collateral purpose.16 Thus despite the calls for caution to be exercised when transplanting trust concepts onto the corporate dimension, it is now trite law that the powers vested in company directors are no different from those wielded by agents or trustees17 and must be exercised only for the purposes for which they were granted. To do so otherwise constitutes, in the language of trusts and
trusteeship, a “fraud on a power”.18 This is regardless of the directors’ protestations of innocence in that they had acted honestly in the best interests of the company.19
7 The duty imposed by the courts on the director to exercise his powers for a proper purpose is merely one of the means of controlling his powers. Other controlling means include the directors’ duty to act bona fide in the best interests of the company and the requirement of directors acting within the scope of their powers under the ultra vires doctrine. Amongst the gamut of duties imposed on the directors, discussion of the proper purpose requirement has been neglected in the past,20 perhaps most obviously relative to its counterpart in the form of the duty to act bona fide in the best interests of the company. However in recent years, some academics have begun to observe a perceptible shift in emphasis and interest from “bona fides” to “proper purposes” as a means of controlling directors’ decisions21 by the courts in Australia and England. The implications and underlying reasons for this continuing trend will be discussed and analysed in the ensuing paragraphs.
8 The position with regards to case authorities has now been clarified. Judges have come to regard the proper purposes doctrine as not just simply another duty of the directors, but a fiduciary duty and an independent one at that. There was never a shadow of doubt over the existence of such a doctrine. In fact, it may well be said that the status of the proper purposes doctrine has always been reasonably well-entrenched in English law22 as the development of the doctrine may be traced as far back as over a
century, beginning with Fraser v Whalley23 in 1864, before finally culminating in Bishopsgate Investment Management v Maxwell (No 2)24 in England in 1994.
9 The critical turning point came in 1967, in the form of a judgment delivered by Buckley J in Hogg v Cramphorn,25 where explicit recognition was given to a proper purpose test “over and above the traditional bona fide test”.26 Prior to Hogg, it was already well-established by a series of cases stemming from Fraser v Whalley,27 that a director’s duty to exercise his power for proper purposes existed.28 What remained unclear was the independence of this duty from the duty to act bona fide in the best interests of the company. Buckley J’s holding in Hogg v Cramphorn was therefore of great importance in this regard.
10 In Hogg v Cramphorn, the directors had allotted shares with special voting rights to the trustees of a scheme set up for the benefit of company employees with the primary purpose of avoiding a takeover bid. Buckley J made a finding of fact that the directors had acted in subjective good faith — that they had indeed honestly believed that their actions were in the best interests of the company. Despite having accepted the directors’bona fides, Buckley J went on to observe that “an essential element of the scheme, and indeed its primary purpose, was to ensure control of the company by the directors and those whom they could confidently regard as their supporters”.29 As such, he concluded that the allotment was liable to be set aside as a consequence of the exercise of the power for an improper motive. Further, it was also held that the power to issue shares was fiduciary in nature.
11 Seven years later, the Privy Council reaffirmed Buckley J’s judgment in Hogg v Cramphorn in the case of Howard Smith Ltd v Ampol Petroleum Ltd,30 thus confirming the growing preference of the latter day English courts for an independent proper purpose doctrine.31 Lord Wilberforce, who delivered the Privy Council’s judgment in
Howard Smith Ltd v Ampol Petroleum Ltd, reiterated the Privy Council’s preference for an independent status of the proper purposes doctrine when he commented that notwithstanding the judiciary’s traditional reluctance to second-guess management decisions which were bonafide arrived at, the courts will not hesitate to intervene and will “look at the situation objectively in order to estimate how critical or pressing, or substantial, or per contra, insubstantial an alleged requirement may have been”.32 Further, “[i]f it finds that a particular requirement, though...
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